UPDATE ON U.S. POWER PRODUCERS' DISPUTES IN TAMIL NADU

UNCLAS SECTION 01 OF 02 CHENNAI 002564

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E.O. 12958: N/A
TAGS: EINV ENRG ECON EFIN PREL PGOV IN
SUBJECT: UPDATE ON U.S. POWER PRODUCERS' DISPUTES IN TAMIL NADU

REF: (A) CHENNAI 2554 (B) CHENNAI 1200 (C) 05 CHENNAI 02705 AND

PREVIOUS (ALL NOTAL)


1. (SBU) Summary: This message provides an update on the
long-standing disputes, often called "legacy issues," between three
U.S. independent powers producers (IPPs) and the Government of Tamil
Nadu (GoTN). In a letter to post received November 8, the GoTN
asserted that it is awaiting a directive from the central
government's Ministry of Power (MoP) before finalizing capital
costs, and it terms the decision of Michigan-based CMS Energy to
approach the International Court of Arbitration at London as
premature. Local representatives of ST-CMS remain hopeful the costs
issue can be resolved without formal arbitration. Separately, New
Jersey-based Covanta Energy awaits a Ministry of Finance decision on
excise duties levied on fuel. Also, both ST-CMS and Covanta seek an
early resolution of the issue of Minimum Alternate Income Tax
(MAIT),which the state power utility Tamil Nadu Electricity Board
(TNEB) has thus far disallowed. The third IPP, New Jersey-based PSEG
Global, has not responded to post's inquiries about its current
situation. End Summary

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Tamil Nadu government sees no need for arbitration
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2. (SBU) Responding to a July 14 non-paper provided by post, Tamil
Nadu Energy Secretary R. Satapathy wrote in a letter delivered to us
on November 8 that the GoTN is awaiting directives from MoP on
finalization of capital costs. TNEB Chairman, Hans Raj Verma,
termed Michigan-based CMS Energy's decision to take its capital
costs dispute to international arbitration as premature (Refs A and
B). In its letter to post, the GoTN asserted that 99 percent of the
admitted claims of U.S. power companies have been paid and that no
significant payments remain pending.

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CMS Energy's hopes for an out of court settlement
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3. (SBU) Chennai-based representatives of CMS Energy tell us they
remain hopeful of an informal settlement with TNEB on finalization
of capital costs. At a November 7 meeting with post, ST-CMS's
Lakshminarayanan told us that TNEB's Verma had indicated that TNEB
is willing to settle the capital costs issue if it receives a
go-ahead from Tamil Nadu Power Minister Arcot Veerasamy.
Lakshminarayanan said a CMS board meeting including representatives
from the U.S. is scheduled for early December in Chennai, and the
board is keen to meet with the Minister Veerasamy to settle the
dispute. Post has agreed to facilitate a meeting.

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Covanta Energy awaits exemption from excise duties
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4. (SBU) The principal concern for New Jersey-based Covanta Energy
remains exemption from paying excise duties imposed on low sulfur
high speed oil used to operate its Tamil Nadu facilities. These
duties were imposed by the central government's Ministry of Finance
in the Union Budget for 2004, which the tax authorities applied with
retrospective effect due of the ambiguous wording of the line item.
Embassy New Delhi has taken up the issue with the authorities, and
the issue currently awaits clearance from Union Finance Minister Mr.

P. Chidambaram. Meanwhile Covanta's negotiations with TNEB on
capital costs have moved ahead, with the cost of an air-conditioning
unit installed at the company facility being resolved (Ref C).
However, new questions on computation of foreign exchange and
development costs valued about $3 million have been raised by TNEB
and are currently being negotiated. In early November,
Balakrishnan, Covanta Energy's Chief Financial Officer, told us he
remains confident of resolving these disputes.

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TNEB disallows income tax claims
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5. (SBU) Contrary to the assertion in the GoTN's letter to post that
all issues have been resolved, local representatives of both ST-CMS
and Covanta Energy maintain that TNEB continues to disallow payment
of Minimum Alternative Income Tax (MAIT) incurred by the companies.
The Power Purchase Agreements between the companies and TNEB

CHENNAI 00002564 002 OF 002


specifically treat all tax claims as "a pass through." Covanta's
Balakrishnan told us TNEB expects the power companies to lobby the
Union Ministry of Finance for a MAIT exemption, as that Ministry has
most to lose over the issue. But with the issues of finalization of
capital costs and securing excise exemption on fuel in play, the
companies feel in no position to take up MAIT, Balakrishnan told us.
He added that MAIT constitutes to be one percent of the amount his
company bills to TNEB.

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PSEG Global Energy remains incommunicado
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6. (U) Post's efforts to contact representatives of the third
American IPP, New Jersey-based PSEG Global Energy, have gone
unanswered. In an annexure to its reply to post, the GoTN asserts
that PSEG Global Energy's stake in Pillaiperumnallur power project
is 20% and that PSEG's efforts to take TNEB to arbitration were
stayed by the Indian Supreme Court in 2005, and that the stay
continues in force.

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Tamil Nadu remains confident of settling disputes
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7. (SBU) Comment: The increasing frustration of the U.S. power
companies with the slow pace of negotiations on the outstanding
issues is at odds with the GoTN's confidence of resolving them. The
GoTN's confidence stems from the close ties that the state
government has with the ruling coalition in New Delhi. In a recent
contact with post, Minister Veerasamy said he had proposals for
projects totaling 35,000 MW pending on his desk, including several
from other U.S. promoters. With Tamil Nadu confident of meeting
existing and future demand and with the IPPs' ongoing difficulties
having little chilling effect on other would-be developers, the
IPPs' leverage appears limited. Patience and flexibility appear to
be the IPPs' best allies. End Comment.


8. (U) This message was coordinated with Embassy New Delhi.

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